MODEL DEMO AND SUBMISSION OF DRAFT REPORT
Hawai‘i Tax Review CommissionStudy of the Hawaii Tax System
August 29, 2012
THE PFM GROUPTwo Logan Square, Suite 1600
Philadelphia, PA 19103
601 S. Figueroa Street, Suite 4500,Los Angeles, CA 90017
0 C lif i S S i 2300
www.pfm.com
50 California Street, Suite 2300San Francisco, CA 94111
Today’s Agendaoday s ge da
Introductions
Project Status
Financial Model: DemonstrationFinancial Model: Demonstration
Financial Model Baseline and Alternate Scenarios
Findings on Sufficiency
Observations and Preliminary Recommendations
Discussion
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Project Status
Phase 1 – Project Planning: Completed
Phase 2 – Information Gathering: Mostly Completed
Phase 3 – Evaluation: Mostly Completed
Phase 4 – Recommendations: Draft Submitted
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Project Status
Expenditure and revenue data sufficient for the baselineExpenditure and revenue data sufficient for the baseline projection have been obtained
There are still some key expenditure areas (such as Medicaid)There are still some key expenditure areas (such as Medicaid) where data has been promised but not delivered
Revenue assumptions are hampered somewhat by lack ofRevenue assumptions are hampered somewhat by lack of recent data, but we are working with DOTAX to get the best information we can
As a result, the general findings are valid, but some movement on revenue and expenditure numbers will take place between the draft and final report
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PFM Long-term Financial Projection Model
PFM has been a leader in developing models for multi-yearPFM has been a leader in developing models for multi year planning at the state and local level
The model facilitates the development of multiple revenue andThe model facilitates the development of multiple revenue and expenditure alternatives that can be built into scenarios and tested for their impact on budgets for multiple years in real time
The model and documentation will be turned over to the State as a project deliverable, and state staff will be trained on its use
Christopher Wheeler, the chief model developer for this project, is going to now demo it for you
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PFM Long-term Financial Projection Model
PFM has been a leader in developing models for multi-yearPFM has been a leader in developing models for multi year planning at the state and local level
The model facilitates the development of multiple revenue andThe model facilitates the development of multiple revenue and expenditure alternatives that can be built into scenarios and tested for their impact on budgets for multiple years in real time
The model and documentation will be turned over to the State as a project deliverable, and state staff will be trained on its use
Christopher Wheeler, the chief model developer for this project, is going to now demo it for you
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Financial Projection Modelj
Insert screen shot of Hawai’i model here
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Financial Model: Input Methodology
The preliminary methodology includes the following:
− Flat Growth (0%) = areas of significant decline in spending or incomplete historical data
− State CPI Forecast* = areas of significant growth in spending or incomplete historical data (3% in 2012, 2.8% in 2013, 2.5% in 2014 and beyond)
− Other State Provided Forecasts = areas where growth / decline is currently known or forecasted with reasonable confidence (i.e. health benefits pension contributions current debt service)health benefits, pension contributions, current debt service)
− Blended AAG / CAGR = expense areas with similar Average Annual Growth Rate and Compounded Annual Growth Rate were determined using a blended average
− Council on Revenues projections for 2013-2018 on revenues
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*Based on 2nd Quarter Forecast published by Hawaii’s Department of Business, Economic Development, and Tourism
Baseline Scenario
The PFM baseline was developed in consultation with DOTAX and includes regression analysis done by PFMand includes regression analysis done by PFM
It projects revenues and expenditures on a current level of service approach – although the model can accommodate pp galternate approaches for either revenue or expenditures
The PFM baseline projects that the State will experience structural budget problems throughout the forecast period:
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Alternate Scenarios
PFM also constructed optimistic and pessimistic revenue scenarios that forecast stronger or weaker than baseline growthscenarios that forecast stronger or weaker than baseline growth during key periods of the model
As can be expected, they diverge in opposite directions from the p , y g ppbaseline, with the optimistic scenario leading to a cumulative $16 billion surplus and the pessimistic scenario a cumulative $14 billion deficit.billion deficit.
While neither is particularly likely, PFM would view the pessimistic scenario as more likely of the two to occur
PFM also modeled the budget on an accrual basis, with the long-term required funding for pension and other post employment b fit (OPEB) li d li bilitbenefits (OPEB) realized as a liability
Under this scenario, the State experiences a funding gap similar to that experienced in the pessimistic revenue forecast scenario
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to that experienced in the pessimistic revenue forecast scenario
High Level Findings: Sufficiencyg g y
The PFM long-term projection model suggests that the current revenue structure will be insufficient to maintain structural balance during the forecast period
This is supported by other national forecasting models, such as the state and local government model maintained by the GAOGAO
While expenditure reductions may also be part of the equation f b d t b l th i di ti th t b d tfor budget balance, there are indications that budget reductions alone cannot cure the structural imbalance
The nature of the pension and OPEB liabilities- The nature of the pension and OPEB liabilities
- The fact that payroll cuts can actually increase the pension funding requirement
10- Federal requirements for Medicaid – and solutions to Medicare
Methodology for Recommendations
The Commission charge included examining possible tax changes from the perspective of key tax policy principles –and particularly mentioned equity and efficiency
PFM also examined the principles of reliability, stability and sufficiency, as well as maintaining a balanced, broad structure
d f i t ith f li dand preferring systems with ease of compliance and administration
It h ld b t d th t i i t t i i l illIt should be noted that in many instances, tax principles will come into conflict
Gi th d t hi t t l b l h tGiven the need to achieve structural balance, when tax principles collided, PFM tended to give greater weight to reliability, stability and sufficiency
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y, y y
Jean Baptiste ColbertJean Baptiste Colbert
“The art of taxation consiststaxation consists in so plucking the goose as toobtain the largest gamount offeathers with the least possibleamount of hissing.”
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Key Strategiesy g
Expand the Tax Base
Reduce Regressivity
Reduce PyramidingReduce Pyramiding
Export a Significant Portion of the Tax Burden
Use Moderate Rate Changes to Increase Revenue
Improve System Administration, Compliance and Transparency
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Key Strategiesy g
Expand the Tax Base
Reduce Regressivity
Reduce PyramidingReduce Pyramiding
Export a Significant Portion of the Tax Burden
Use Moderate Rate Changes to Increase Revenue
Improve System Administration, Compliance and Transparency
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Base Expansionp
Reduce the pension exemption in the Individual Income TaxReduce the pension exemption in the Individual Income Tax
Eliminate the deduction for property taxes paid
Cap or replace with grant programs certain tax credits
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Reduce Regressivity and Pyramidingg y y g
Provide a low income exemption of up to $20 000 of adjustedProvide a low income exemption of up to $20,000 of adjusted gross income for the individual income tax
Double the refundable food/excise tax creditDouble the refundable food/excise tax credit
Eliminate the 0.5 percent GET and use tax rate for business to business transactionsbusiness transactions
Allow the Act 105 temporary suspensions to sunset on scheduleschedule
Eliminate the three-tiered corporate net income tax with a single rate of approximately 9 percent to recoup some of thesingle rate of approximately 9 percent to recoup some of the lost GET tax revenue
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Export Tax Burden/Attain Positive E t litiExternalities
Increase cigarette and tobacco taxesIncrease cigarette and tobacco taxes
Increase gallonage taxes on beer, wine, and distilled spirits
Eliminate the sunset on the Transient Accommodations Tax
Restore the surcharge on rental cars
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Rate-raising and Improved Administrationg p
Increase the GET rate to 4 5 percentIncrease the GET rate to 4.5 percent
- Median state rate is 6.0 percent
- Will still be the lowest combined average rate (state and local) in the- Will still be the lowest combined average rate (state and local) in the country
Develop tax gap compliance systems using vendors via a performance-based contract
Create a compliance and productivity account to fund technology and staffing improvements from increased tax collections related to improved compliance
Provide tax expenditure reports on a regularly scheduled basis
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Next Stepsp
The Project Team will refine the model assumptions forThe Project Team will refine the model assumptions for revenue and expenditure alternatives and work to finalize all models and outputs in the next four weeks
Based on feedback, a final report detailing project findings will be delivered the week of September 24th
We will work with you and key stakeholders to communicate project findings as appropriate
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Questions and Discussion
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